AT R1.5-trillion the 2016-17 national budget tabled by Finance Minister Pravin Gordhan on Wednesday is SA’s biggest yet.
It is also the most politically contentious as it was drawn up against the backdrop of a looming credit rating downgrade and the ejection in December of Nhlanhla Nene as finance minister.
Though the Treasury has done the usual job of deftly dancing around sensitive social and political issues, making and squeezing concessions from different sectors, questions remain about the future of the fiscal framework should the economic growth rate continue to decline. Much of the recent data show SA is skirting recession and is in grave danger of a contraction.
"Growth is key to protecting our fiscal credibility and sovereignty. Our problems cannot be resolved by fiscal and monetary interventions alone because the growth rate heavily influences many of the key ratios that determine our credit standing," Mr Gordhan told Business Day this month.
The growth strategy and narrative around it are worth examining more closely, as are the bizarre machinations that preceded the budget’s tabling at the December Cabinet meeting — hours before Mr Nene’s shock dismissal.
Together they offer insights into the country’s fiscal framework, given the inclinations of some influential Cabinet members to question the Treasury and the budget.
Mr Nene’s firing has been widely commented on, as were the catastrophic losses to SA’s credibility; the weakening of the rand (it has still not recovered) and the erosion of stocks in key sectors such as financial services and banking.
Much has also been said about the folly of the decision and the implications for the way such momentous decisions were taken in the governing party, the African National Congress. But what remains unknown are the intriguing behind-the-scenes events a few weeks before Mr Nene’s dismissal; they are key to understanding Mr Gordhan’s challenge as he tries to restore fiscal credibility.
The Treasury’s role is enshrined in the Constitution and given life through the Public Finance Management Act. This constitutional imperative means people from outside are unable to easily influence the Treasury. It also explains why the Treasury has remained largely immune to the kind of political meddling that has seen other departments descend into chaos or dysfunction.
In the Jacob Zuma era this has included numerous incidences of state capture by private interests linked either to him or other powerful people, and why he is willing to turn a blind eye to the rot in the system.
"The constant refrain is that the Treasury is a state within a state. Not only do they appear to decide on their own what the rest of the government should do, they are also not willing to submit to the Cabinet collective," says an insider in the Presidency, speaking on condition of anonymity because they are not authorised to speak to the press.
The statement was made last year when clear lines of attack on the Treasury, and therefore Mr Nene, began to appear. The attacks came out of existing ideological differences in the Cabinet; fights over fiscal limits; and grubby power politics relating to special projects aligned to the president.
In the end Mr Nene and his 2016-17 budget became the ham in a politically contested sandwich from which he, without the support of his boss, could only be a casualty.
Trouble began in July last year when a document purporting to be an intelligence report surfaced and was circulated to the press.
Spurious intelligence documents were not new. What was different with this one was the target: the Treasury.
The document claimed Mr Nene was captured by something called "Project Spider Web", and alleged "agents of the old regime and foreign forces". Many Treasury staff, former finance minister Trevor Manuel and Deputy Finance Minister Mcebisi Jonas were named as part of the alleged plot.
In essence, the document claimed the Treasury was working against the ANC government at the behest of "the Stellenbosch mafia".
The document was met with scepticism, and the claims gained no traction because they were widely dismissed.
But the onslaught continued. There was another offensive when the National Planning Commission — with mostly new and some terribly inexperienced members — met in early November.
Once again, the budget (read Treasury) came under scrutiny, with some commissioners declaring that it was misaligned.
In a discussion that betrayed the ignorance of some of the commissioners, a South African Reserve Bank official was asked to explain the importance of monetary and fiscal policy, and whether or not "they benefited the people". Some commissioners complained that the budget was "not based on people".
The commissioners didn’t just go on an unauthorised expedition about the Treasury. It is understood that they had been informed by the chairman, Minister in the Presidency Jeff Radebe, that they could "question and change the budget if necessary". The president permitted this, the commission was told.
Notably, the presentation on the budget was not done by the Treasury but relied on an earlier presentation made to the Presidency. While some of the newer commissioners appeared to believe that they could alter the budget, no one in the meeting cared to explain the constitutional implications of their attempting to do so.
A second line of attack, which was evident in the final Cabinet meeting of the year in December, was that the budget presented by Mr Nene and his team was not aligned with the Medium-term Strategic Framework.
But the real issue was availability of funds for a long wish list not accommodated in the spending plans, something Mr Nene is understood to have emphasised more than once.
Even though members of the Cabinet were made aware — repeatedly — of the implications for the fiscal framework should the Treasury borrow more to fund government programmes, including a new nuclear power programme, the complaints against the Treasury continued.
"The meeting ended without the Budget being approved and with none of the funding options presented by Treasury being actually considered. That was because, apart from budget cuts, which we are likely to see this year, they would effectively change the fiscal framework despite the government’s insistence that it was staying put," said a senior government official present at the meeting.
Only Mr Zuma can say whether or not the pressure put on Mr Nene by some of his Cabinet colleagues was the final piece in his dismissal puzzle. Mr Zuma nonetheless fired Mr Nene a few hours after his presentation.
With Mr Nene suddenly jettisoned out, the Department of Performance Monitoring and Evaluation once again reviewed the budget.
"It was a futile exercise that the Treasury didn’t appear to worry too much about. The budget is put together after a long period of consultation with departments and could not be tinkered with just before Christmas," said a Presidency official at the time.
In any event, the market reaction to Mr Nene’s dismissal profoundly changed the dynamics and, ironically, shored up the Treasury’s political position.
The market reaction also hampered ambitions of procuring 9,600MW of nuclear power from Russia, a decision taken despite protestations by the Treasury.
A day after his appointment as finance minister, Mr Gordhan made it clear that a nuclear build programme would be pursued only when there was enough money to do so, and in a size that could be afforded.
The installation of Desmond van Rooyen as finance minister to replace Mr Nene — even though it was only for a few days — unhinged much of the institutional solidity at the Treasury.
Apart from political backbiting, there appeared to be elements of state capture as Mr van Rooyen was accompanied by mysterious "advisers", whose names he did not appear to easily recall when he introduced them to Treasury officials.
The "advisers" are said to be associated with Mr Zuma’s friends, the Gupta family, who are in business with his son, Duduzane Zuma. Though refusing to comment on Mr van Rooyen, Mr Gordhan is adamant that any attempt to interfere with the Treasury will be vigorously repelled.
He has gained support for the Treasury’s independence from the ANC’s national executive committee. It has come out strongly against the capture of state institutions by private interests. Some are linked to its top politicians, including the president.
So for now the Treasury is safe, but the real work to turn around the economy is only beginning. Mr Jonas is very clear on what needs to be done to fundamentally change the narrative that has started to take root.
"In addition to structural reforms we need an economic growth package that is targeted at specific sectors of the economy and is supported by strong governance mechanisms," he said.
As much as fiscal prudence is needed in the face of looming difficulties, Mr Gordhan is working hard to develop a collaborative growth narrative. Several meetings with business, some of which included Mr Zuma, have been held in the weeks leading up to the tabling of the budget. Whether or not they result in sustained and meaningful policy implementation is yet to be seen.
Some analysts say it is too late to avert a downgrade.
Thabi Leoka, economist at Argon Asset Management said though a downgrade is not a given, it may be too late to avoid a descent. "Apart from rapidly slowing economic growth, we have budget and current account deficits which have failed to narrow for years. Credit rating agencies are looking for an ability to comfortably service debt, and the combination of the three factors is unhelpful," she said.
Ms Leoka says a sub-investment grade rating appears to have already been partially priced in by the market as South African bond yields started rising from around August last year.
Mr Gordhan’s strategy to avoid a downgrade hinges on the cost-control measures he has championed and bringing in private sector investment to reduce the risk posed by state-owned entities.
In the long term, interventions are likely to include regulatory and other structural reforms to unlock economic growth.
Whether or not the current crisis puts pay to the persistent attempts to capture the Treasury politically remains to be seen. The same can be said about the willingness to stick to strict financial controls.
FINISHING TOUCHES: Deputy Finance Minister Mcebisi Jonas, sitting, left, Finance Minister Pravin Gordhan, centre, and Treasury director-general Lungisa Fuzile work on the budget presentation on Tuesday afternoon. Standing on the left is Dondo Mogajane, chief operating officer at the Treasury. Picture: TREVOR SAMSON
AT R1.5-trillion the 2016-17 national budget tabled by Finance Minister Pravin Gordhan on Wednesday is SA’s biggest yet.
It is also the most politically contentious as it was drawn up against the backdrop of a looming credit rating downgrade and the ejection in December of Nhlanhla Nene as finance minister.
Though the Treasury has done the usual job of deftly dancing around sensitive social and political issues, making and squeezing concessions from different sectors, questions remain about the future of the fiscal framework should the economic growth rate continue to decline. Much of the recent data show SA is skirting recession and is in grave danger of a contraction.
"Growth is key to protecting our fiscal credibility and sovereignty. Our problems cannot be resolved by fiscal and monetary interventions alone because the growth rate heavily influences many of the key ratios that determine our credit standing," Mr Gordhan told Business Day this month.
The growth strategy and narrative around it are worth examining more closely, as are the bizarre machinations that preceded the budget’s tabling at the December Cabinet meeting — hours before Mr Nene’s shock dismissal.
Together they offer insights into the country’s fiscal framework, given the inclinations of some influential Cabinet members to question the Treasury and the budget.
Mr Nene’s firing has been widely commented on, as were the catastrophic losses to SA’s credibility; the weakening of the rand (it has still not recovered) and the erosion of stocks in key sectors such as financial services and banking.
Much has also been said about the folly of the decision and the implications for the way such momentous decisions were taken in the governing party, the African National Congress. But what remains unknown are the intriguing behind-the-scenes events a few weeks before Mr Nene’s dismissal; they are key to understanding Mr Gordhan’s challenge as he tries to restore fiscal credibility.
The Treasury’s role is enshrined in the Constitution and given life through the Public Finance Management Act. This constitutional imperative means people from outside are unable to easily influence the Treasury. It also explains why the Treasury has remained largely immune to the kind of political meddling that has seen other departments descend into chaos or dysfunction.
In the Jacob Zuma era this has included numerous incidences of state capture by private interests linked either to him or other powerful people, and why he is willing to turn a blind eye to the rot in the system.
"The constant refrain is that the Treasury is a state within a state. Not only do they appear to decide on their own what the rest of the government should do, they are also not willing to submit to the Cabinet collective," says an insider in the Presidency, speaking on condition of anonymity because they are not authorised to speak to the press.
The statement was made last year when clear lines of attack on the Treasury, and therefore Mr Nene, began to appear. The attacks came out of existing ideological differences in the Cabinet; fights over fiscal limits; and grubby power politics relating to special projects aligned to the president.
In the end Mr Nene and his 2016-17 budget became the ham in a politically contested sandwich from which he, without the support of his boss, could only be a casualty.
Trouble began in July last year when a document purporting to be an intelligence report surfaced and was circulated to the press.
Spurious intelligence documents were not new. What was different with this one was the target: the Treasury.
The document claimed Mr Nene was captured by something called "Project Spider Web", and alleged "agents of the old regime and foreign forces". Many Treasury staff, former finance minister Trevor Manuel and Deputy Finance Minister Mcebisi Jonas were named as part of the alleged plot.
In essence, the document claimed the Treasury was working against the ANC government at the behest of "the Stellenbosch mafia".
The document was met with scepticism, and the claims gained no traction because they were widely dismissed.
But the onslaught continued. There was another offensive when the National Planning Commission — with mostly new and some terribly inexperienced members — met in early November.
Once again, the budget (read Treasury) came under scrutiny, with some commissioners declaring that it was misaligned.
In a discussion that betrayed the ignorance of some of the commissioners, a South African Reserve Bank official was asked to explain the importance of monetary and fiscal policy, and whether or not "they benefited the people". Some commissioners complained that the budget was "not based on people".
The commissioners didn’t just go on an unauthorised expedition about the Treasury. It is understood that they had been informed by the chairman, Minister in the Presidency Jeff Radebe, that they could "question and change the budget if necessary". The president permitted this, the commission was told.
Notably, the presentation on the budget was not done by the Treasury but relied on an earlier presentation made to the Presidency. While some of the newer commissioners appeared to believe that they could alter the budget, no one in the meeting cared to explain the constitutional implications of their attempting to do so.
A second line of attack, which was evident in the final Cabinet meeting of the year in December, was that the budget presented by Mr Nene and his team was not aligned with the Medium-term Strategic Framework.
But the real issue was availability of funds for a long wish list not accommodated in the spending plans, something Mr Nene is understood to have emphasised more than once.
Even though members of the Cabinet were made aware — repeatedly — of the implications for the fiscal framework should the Treasury borrow more to fund government programmes, including a new nuclear power programme, the complaints against the Treasury continued.
"The meeting ended without the Budget being approved and with none of the funding options presented by Treasury being actually considered. That was because, apart from budget cuts, which we are likely to see this year, they would effectively change the fiscal framework despite the government’s insistence that it was staying put," said a senior government official present at the meeting.
Only Mr Zuma can say whether or not the pressure put on Mr Nene by some of his Cabinet colleagues was the final piece in his dismissal puzzle. Mr Zuma nonetheless fired Mr Nene a few hours after his presentation.
With Mr Nene suddenly jettisoned out, the Department of Performance Monitoring and Evaluation once again reviewed the budget.
"It was a futile exercise that the Treasury didn’t appear to worry too much about. The budget is put together after a long period of consultation with departments and could not be tinkered with just before Christmas," said a Presidency official at the time.
In any event, the market reaction to Mr Nene’s dismissal profoundly changed the dynamics and, ironically, shored up the Treasury’s political position.
The market reaction also hampered ambitions of procuring 9,600MW of nuclear power from Russia, a decision taken despite protestations by the Treasury.
A day after his appointment as finance minister, Mr Gordhan made it clear that a nuclear build programme would be pursued only when there was enough money to do so, and in a size that could be afforded.
The installation of Desmond van Rooyen as finance minister to replace Mr Nene — even though it was only for a few days — unhinged much of the institutional solidity at the Treasury.
Apart from political backbiting, there appeared to be elements of state capture as Mr van Rooyen was accompanied by mysterious "advisers", whose names he did not appear to easily recall when he introduced them to Treasury officials.
The "advisers" are said to be associated with Mr Zuma’s friends, the Gupta family, who are in business with his son, Duduzane Zuma. Though refusing to comment on Mr van Rooyen, Mr Gordhan is adamant that any attempt to interfere with the Treasury will be vigorously repelled.
He has gained support for the Treasury’s independence from the ANC’s national executive committee. It has come out strongly against the capture of state institutions by private interests. Some are linked to its top politicians, including the president.
So for now the Treasury is safe, but the real work to turn around the economy is only beginning. Mr Jonas is very clear on what needs to be done to fundamentally change the narrative that has started to take root.
"In addition to structural reforms we need an economic growth package that is targeted at specific sectors of the economy and is supported by strong governance mechanisms," he said.
As much as fiscal prudence is needed in the face of looming difficulties, Mr Gordhan is working hard to develop a collaborative growth narrative. Several meetings with business, some of which included Mr Zuma, have been held in the weeks leading up to the tabling of the budget. Whether or not they result in sustained and meaningful policy implementation is yet to be seen.
Some analysts say it is too late to avert a downgrade.
Thabi Leoka, economist at Argon Asset Management said though a downgrade is not a given, it may be too late to avoid a descent. "Apart from rapidly slowing economic growth, we have budget and current account deficits which have failed to narrow for years. Credit rating agencies are looking for an ability to comfortably service debt, and the combination of the three factors is unhelpful," she said.
Ms Leoka says a sub-investment grade rating appears to have already been partially priced in by the market as South African bond yields started rising from around August last year.
Mr Gordhan’s strategy to avoid a downgrade hinges on the cost-control measures he has championed and bringing in private sector investment to reduce the risk posed by state-owned entities.
In the long term, interventions are likely to include regulatory and other structural reforms to unlock economic growth.
Whether or not the current crisis puts pay to the persistent attempts to capture the Treasury politically remains to be seen. The same can be said about the willingness to stick to strict financial controls.
News, views and analysis of Finance Minister Pravin Gordhan's 2016 budget
Change: -0.47%
Change: -0.57%
Change: -1.76%
Change: -0.34%
Change: 0.02%
Data supplied by Profile Data
Change: -1.49%
Change: 0.08%
Change: -0.47%
Change: 0.00%
Change: -0.04%
Data supplied by Profile Data
Change: -0.34%
Change: 0.03%
Change: -0.10%
Change: -0.22%
Change: -0.81%
Data supplied by Profile Data
Change: -0.28%
Change: -1.15%
Change: -0.07%
Change: -1.21%
Change: -0.22%
Data supplied by Profile Data